Sanjay Agarwal, the Founder, MD & CEO of AU Small Finance Bank, expressed cautious optimism about the bank’s growth prospects for FY26. Despite the challenges faced in FY25, including a tough business environment and liquidity issues, Agarwal believes that the bank is well-prepared for the current financial year. He attributes this preparedness to the regulator’s focus on growth and the government’s efforts to address liquidity concerns.
Regarding margins, Agarwal expects some improvement, but cautions that it may not happen immediately. He predicts that interest rates on the wholesale side will ease, but this may not translate to higher margins due to the need to offer competitive rates to attract deposits. Agarwal notes that the bank’s small size means it has to price its products 25 basis points higher than larger lenders, which can impact margins.
On asset quality, Agarwal is optimistic that credit costs will come down in FY26. He expects the bank’s retail asset credit cost to decrease from 0.90% to 0.8%, and commercial banking credit cost to decrease from 0.4% to 0.3%. Microfinance credit cost is also expected to improve, with a forecast of 4% for FY26, down from 7.7% in the previous year.
Agarwal attributes the expected improvement in asset quality to the bank’s preparedness and the anticipated pick-up in economic growth. He believes that the worst of the stress in the microfinance sector is behind them, and that the bank has accounted for potential issues in its planning.
When asked about growth prospects, Agarwal declined to provide specific numbers, citing the need to wait and watch the economic environment. However, he suggested that the bank will grow at least twice the nominal GDP growth rate, implying double-digit growth. He also clarified that the issues in Karnataka, which account for 10% of the bank’s book, are under control, with recovery rates improving to 98% in March.
Overall, Agarwal’s outlook for FY26 is cautious, but optimistic. He believes that the bank is well-prepared to navigate the challenges ahead, and that credit costs will come down, leading to an improvement in return on assets. While he is circumspect about providing specific growth targets, he expects the bank to deliver double-digit growth, driven by an anticipated pick-up in economic activity.